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Billing, Collecting and Suing for Fees

By Michael Davenport

Camico’s claims and loss prevention experts have spent several years studying the various aspects of CPA fees, billings, collections, suits for fees, and arbitration. The following represents a summary of our collective findings and experience.

Q: What’s the best way for a CPA firm to avoid having a collection problem?
A: The best way is to communicate your billing and collection policies in your engagement letter, including stop-work or disengagement provisions, or both, that can be enforced if a client doesn’t pay you in accordance with the engagement letter. Bill on a timely basis, and do not allow fees to build up to the point where you can no longer walk away from them. When unpaid fees become too large, they provide an incentive for the client to sue for malpractice, especially when the CPA sues for fees.

Q: What is the best way to collect from slow-paying or nonpaying clients?
A: There are two basic options: 1) binding arbitration for fee disputes; and 2) suing to collect fees.
The first option, binding arbitration for fee disputes only, is recommended by Camico. Our claims experience shows that suing for fees creates a high probability of a countersuit by the CPA’s client, usually alleging malpractice during the engagement in question. This escalates the situation from a simple fee dispute to a malpractice lawsuit. That’s why Camico provides as much as 5 percent premium credit to policyholders who agree to exclude coverage for claims arising subsequent to suits for fees.

The second option, suing to collect fees, is the riskier of the two options. CPAs should carefully weigh the risks and consequences of suing for fees. Lawsuits and countersuits often create situations in which everyone spends far more in attorney fees than is warranted for the fees owed to the CPA. It is important to be aware of all of the potential costs and consequences before committing to a lawsuit.

Q: Can I just use a general arbitration clause in my engagement letters?
A: Camico does not recommend arbitration for disputes other than simple fee disputes. The only exception might be simple individual income tax return preparation engagements (1040 forms), but not complex returns. We advise CPAs to not use a general arbitration clause in an engagement letter. Most engagements, when in dispute, tend to produce complex, high-risk, high-dollar disputes that are better managed through litigation than arbitration. An effective legal defense can be restricted and impaired by arbitration.

Q: How do I get the client to agree to binding arbitration for fees disputes only?
A: The best way is to have a binding arbitration clause for fee disputes only in your engagement letter, which is signed by the client. Use an engagement letter to spell out the scope of the work you will perform for a client, including the limitations and responsibilities of each party. Consider including a fee estimate, noting that unforeseen circumstances or changes in the engagement could make a revision necessary. An excellent resource for engagement letters is the CPA’s Guide to Effective Engagement Letters. An order form for the book can be found at www.camico.com. Click on “Services,” scroll down to “Practice Management Tools,” click and scroll down to the order form link.

Following are some other effective tips for avoiding problems stemming from billing and collections issues:

Start off on the right foot.

  • Be sure to price your services as high as they should be. Underpricing can increase pressure on you to maintain revenue by hurrying through complex tasks, increasing the chance of error and liability.
  •  Work with credit-reporting services to identify problem clients before accepting engagements. Where possible, check clients’ payment history with their prior CPAs. Listen carefully—sometimes what they don’t say is important. Fearful of liability for slander, practitioners are more likely to praise a good client than criticize a difficult one.
  • Request a retainer at the beginning of an engagement, especially from clients with a poor credit history.

Keep clients informed of what they owe you.

  • Bill only for tasks within the scope specified in the engagement letter. Charge for additional work only with the client’s written permission.
  • Keep invoices simple and easy to understand. In the event of a legal dispute, bills that are precise, accurate and agree with other engagement documentation could decide the case in your favor.
  • Negotiate a mutually convenient billing cycle with your clients. Then, bill for completed tasks as soon as possible, while the work is fresh in their minds.

Get paid on time.

  • Consider allowing clients to use credit cards or promissory notes as payment options. Credit cards are convenient for clients and—if you’re willing to pay bank fees—enable you to spend less time on collections and more on developing new business. State laws govern the terms of promissory notes, but within those limits you can customize the notes to suit your needs and those of your clients.
  • Closely monitor and document clients’ payment history. When payments are late, speak directly with the client’s accounts payable manager and ensure that he or she understands the terms of your agreement.
  • Consider using a collection agency only after you have done everything possible on your own to settle the account.
Michael Davenport, J.D., is a senior professional liability claims specialist with Camico Mutual Insurance Company. He has nearly 20 years of experience in managing claims and has developed expertise in accounting malpractice claims avoidance and mitigation procedures.

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